Enlarging the Market: A Financial Problem

PERHAPS the simplest and briefest way of stating the basic objectives of national economic planning today is to say that the market must be enlarged and social control achieved. Just as the more logical and hard-minded communists like Lenin predicted, liberal capitalism is slowly going to pieces on the failure of the market to continue to absorb adequately the increasing supply of goods which must be produced and sold if the system is to work and, also, if the unemployed are ever to work again. We have already, in another connection, disposed of the classical argument of capitalism that the production of goods and services inevitably though tardily provides the necessary market for the total output. The fact and old custom of hoarding, now in revival, is knocking that argument into a cocked hat.

Increasing the domestic market presents difficulties mainly in the field of finance. No sensible person questions that there are desires and needs for a larger output or that there is ample capacity for its production. The only serious objection raised is, “But where is the money to come from?” The answer, obviously, is, “From the same sources which have furnished all our money for wars and industrial expansion in the past.” If the objection takes the form of the question, “But how is this additional production and consumption to be paid for?” The answer is, “With more production.” Things have ultimately to be paid for (if they are really paid for) with other things, money symbols being only the counters. The making of the money, whether by a turn of the government printing press or a stroke of a banker’s pen, is always an extremely simple and easy matter. As the act of paying out money, whether for consumption or producers goods, initiates the necessary production, it is with a use of money that the economic process seems always to begin.

So strategic is the rôle of money that it seems to many people the only thing that matters in the economic process. This seems especially plausible, due to the fact that, from the point of view of the individual, with money he can buy or command almost any good or service, and without money he can do or obtain practically nothing. The trouble here, of course, is that the individual cannot make money with a stroke of a banker’s pen or a turn of the government printing press. The individual cannot make money — he can only obtain it from those who have it. And this he can only do if they will give him money for something he can produce or lend him money. Hence, if he cannot sell his product or labor for money, or borrow money, the question “Where is the money coming from?” completely floors him. As long as most individuals under liberal capitalism, could readily sell their labor or products of their labor, skill, land, and tools, there was no economic or monetary problem. A prospective sale only can make a sound loan under private capitalism. No sale in prospect, no bank loan requiring such sale for repayment. This explains why bank loans to business are shrinking and why the banks in 1935 are buying 91% of the new government bonds, the banks now holding 53% of the total federal debt.

Now, however, the problem of getting more money spent demands solution, and the solution requires the intervention of an initiating agent who is not embarrassed by the inability to make or get money except by the sale of something in an open market. In the present situation, that agent can only be the State or the person who has the right to make money and the power to get it back without having to rely on a sale in the free market to obtain it.

People hear with horror any mention of government-made money. They have been trained to believe that only money made by a stroke of a banker’s pen in creating a loan and a corresponding deposit credit is good money. No amount of bank losses and failures seems to shake his faith. An old fashioned liberal professor of economics or finance would try to explain the creation of bank money or bank deposit credit as constituting not creation of something that did not exist already, but merely as the mobilization of money or credit which existed already but which only a bank could mobilize. The bad faith of this explanation lay in the fact that if it were invoked to justify a government creation of money it was indignantly rejected by those who used it to rationalize a banker’s creation of money.

Obviously, all creations of paper, token, or bank deposit money, whether by the government, a central bank, a public or a private bank, are creations of fiat money and are fraught with the same dangers. Every depression is a series of proofs of the unsoundness of a large volume of bank-made money credit. Only commodity money, like gold and silver, which as a commodity, is worth its face value, is not fiat money. Al] our economic prosperity and achievements have been financed by fiat money, and all our economic blunders or misfortune can be attributed to fiat money, facts which should indicate the pointlessness of using terms like fiat money to disapprove of any given expenditure or investment, public or private.

Every effort should be made to avoid the evils of inflation, or a depreciating currency and collapsing credit structure. But these evils can never be avoided through the use of definition. It is not certain that these evils, as a practical matter, can ever be entirely avoided. But, certainly, every reasonable undertaking should be made to avoid them. The only way to avoid or minimize these evils is to keep the volume and velocity of circulation of all money, paper and bank deposit money, in fairly stable relation to the volume of production.

If the total sum of money payments made in a given period increases markedly faster than the total volume of goods and services produced for sale in that period, there will ordinarily be inflation, rise in prices, and a fall in the value of money. Incidentally, it is to be remarked that communist Russia has been steadily inflating its currency and depreciating the purchasing power of the currency in the execution of its construction and five-year programs. And, as every one knows, no capitalist or fascist country since the War has enjoyed prosperity except when, and in measure as, it was indulging in inflation. It remains to be shown, therefore, that the evils of inflation are entirely avoidable. Anyone who claims he has a sovereign remedy against the evils of inflation is sure to be a charlatan, for if there be such a remedy, it has not been demonstrated and, until the demonstration has been made, no one has a right to assert that he knows that he has a remedy. But the fact that no one knows a sovereign preventive of the evils and mistakes of inflation is no reason why money should not be created and spent by government to end unemployment, increase the supply of goods, enlarge productive capita] and, presumably, thereby to increase the sum of human happiness. After all it must be remembered that capitalist America, communist Russia, and fascist Germany, enjoy great additions to their productive capital and current income as a result of inflationary spending and capital goods construction. And, after all, these benefits undoubtedly outweigh the real evils which have attended or followed inflation.

Obviously, every attempt must be made to keep physical production and the quantity-times-circulation velocity of money in the right relation — quantity of goods to quantity of money — and thereby to avoid or minimize the evils of inflation. This problem, however, cannot be solved by legal definitions or prohibitory law. The only prohibitory law which would be adequate and relevant to the prevention of the evil of inflation under liberal capitalism would be absurd, for such a law would have simply to prohibit depressions. If depressions can be prevented or minimized it will not be by prohibition or legal definitions. It will be by executive management. This is one of the reasons why the fascist formula must supplant the liberal formula which, in the economic sphere, really allows the State little more than the remedies of judicially defined and applied prohibition and punishment after the act.

Among the rules for avoiding inflation, the simplest to state can be worded briefly somewhat as follows: (1) Create new money, bank deposit money, or paper money, only for the retirement of debts and payment for the production of new physical goods and services. (2) Create and offer no more money for goods and services than is required to obtain the maximum attainable output from the existing plant. When more goods are demanded with money than the available supply and means of production can satisfy, prices go up, money goes down — and inflation is on. Creation and use of additional money for speculation and for attempts to force production beyond physical limits must be avoided if inflation is to be averted.

If it is easy to state these simple rules, it is by no means easy to know how and when to apply them. What is even more important at present is the fact that, within the framework of liberal capitalism, it is out of the question even to make any serious attempt to enforce observance of these rules. Among the chief reasons why no serious attempt can ever be made under liberal capitalism to apply the first rule are the following: Banks create money for loans in proportion to the interest they can obtain on loans with safety as to repayment. Speculators pay the highest interest rates, and often are able to give excellent security. So banks prefer loans to speculators if, as is usually the case, there are satisfactory guarantees of repayment of loans to finance speculations. Call loans on Stock Exchange securities as collateral are perfect examples of good loans for bankers and bad loans for economic order. The guarantees of these socially bad loans inhere, not in the economic soundness of the loan, but in special market machinery, special legal contracts, and the fact that there is always a buyer (usually a sucker who buys on a falling market) for bad and overpriced bank collateral to take it off the hands of the bank before that institution gets stuck.

Banks, we see, then, do not ordinarily, and could not effectively if they would, control the uses made of money they create and lend so as to check inflation and speculation. A borrower may say he wants a loan for a given purpose, like building himself a home, or a corporation may say it wants a loan for some stated business use or investment. The borrowing individual may build the home, and the corporation may make the stated business use or investment of so much money. At the same time, however, the individual home builder, or the corporation, may make a speculative use of a similar amount of money which would not have been made had the loan not been obtained for the other alleged purpose. The point, of course, is that, as a rule, borrowers (certainly the rich individual and the large company) usually have lots of money at the time they borrow a given sum in addition to that sum. Consequently, in most cases, a given loan merely swells the cash holdings of the borrower. It is, therefore, absurd to say of a given loan to a borrower, through whose hands several times as much money flows every week or every year, that that particular loan went to a given purpose. Such a statement is exactly like saying that a small rivulet which runs into one of many streams which feed many reservoirs which supply New York city with water is the rivulet which furnishes the water for the city Hall or the Union League Club.

In brief, whatever they may advertise to the contrary, banks have to be guided in making loans mainly, if not exclusively, by two rules: (1) Get the highest return possible on the loan. (2) Get the loan repaid. Loans which meet these rules have to be made, whatever harmful social effects they may produce. And loans which do not meet these rules have to be avoided, whatever beneficial social fruits they might bear. This being true, private banks must necessarily pour oil on the fires of speculation when they start burning, and they must fail to prime recovery in a crisis like that of the present, when good loans in sufficient quantity cannot be found. To prevent the creation of new bank money by banks to enable speculators to pay higher prices for Florida real estate or Stock Exchange securities it is necessary to take the power to create new money for loans from private bankers, who must always use such power in a way to feed the fires of speculation, because loans to speculators on price changes are usually the most profitable to banks. But even if the State has the monopoly of banking, as in Communist Russia, the State may, as Communist Russia is doing, create the evils of inflation by creating and spending money to pay for more physical production than the productive plant of the nation is capable of furnishing. To avoid the evils of inflation, it is necessary among other things, to have no creation of money to finance speculators in bidding up prices of goods already produced, and also to have no creation of money to finance a greater demand for new production than the available productive resources can supply.

Now, as I have said, no one can claim for any formula that it will insure adequate observance of these two rules and any others for avoiding inflationary evils. Furthermore, we cannot be sure that a State following and enforcing these rules might not still run into inflation through the operation of factors beyond its control producing scarcity. All that can fairly be claimed for fascism, in this respect, is that it offers the best political and administrative formula for keeping money and production in the right relation to insure stability and to avert inflation. Keeping production up to capacity, and not trying to force it too much, may be said to constitute problems in scientific measurement of a sort which presents no real difficulties, value selection problems which are exercises in imagination and power, and administrative problems, the like of which have to be met in all large human undertakings.

The ends of successful executive attack on this problem will not be helped by the usual arguments and concepts employed in discussion of monetary and economic questions. Nor will the standards of sound or successful finance for private banks and individuals furnish much useful guidance for the government undertaking to spend or invest enough money every year to take up the slack in private spending and investing. The rules for sound private or commercial banking can be found in hundreds of text-books. These rules amount to saying “Don’t make a bad loan.” When times are good it is hard to make a bad Loan, if ordinary precautions are taken against embezzlers and frauds. When times turn bad, the formerly good loans go sour and it proves impossible to find enough good loans (that is, loans that will be repaid) for one’s idle funds.

All of this merely proves that most of the rules for sound banking, beyond those aimed at frauds, are largely superfluous. The maker of a private or bank loan has chiefly to rely for repayment on a set of conditions and events over which he cannot possibly exercise any control. As the elder Mr. Morgan once testified, in 1913, before a Senate Committee, character is about the only useful standard for making loans. Borrowers may be selected according to character. The rest, to a large extent, lies outside the control of borrower and lender. Assuming character factors and general conditions are favorable, the private or bank lender relies mainly on the open market to provide the borrower with funds to repay the loan.

Government creations of credit to finance spending and investing, however, cannot rely on the character of borrowers favorable business conditions, and a market which will put the borrowers in funds for the repayment of the government loan. If this happy combination of conditions were present, there would be no need for government intervention in the economic process. If government could find good borrowers, such borrowers could find ample accommodations from the banks. If ample borrowing demands of the right sort met ample supplies of loan funds, there would be no depression. No; government creations of credit to finance social expenditure and investment must rely on entirely different mechanisms and principles to keep credit and money sound, or to keep production and money in the right relation one to the other. For one thing, government expenditures on social services cannot be recovered by the sale of such services in the open market. If the parents of the children who attend the public schools had to pay the cost of the instruction of their children, most of the children now in school would not be there, much to their joy and the joy of the taxpayers who are constantly denouncing high taxes. For another thing, government investments in slum clearance, grade crossing elimination, and highway and public works projects of all sorts, cannot possibly earn their capital costs, through charges collected, in a free market. If they could, private initiative and private funds would finance and execute most of these projects for the rents, tolls, or charges, obtainable from them. The chief reasons, of course, why capital charges on so many desirable building projects are more than rentals would cover are high interest rates and inflated land values.

From the foregoing considerations, it follows naturally that if government is to make large social expenditures and investments, government must exercise two important public powers in this connection. First, it must levy the appropriate tolls or taxes to get back into the public treasury each year as much money as it puts out on such expenditures and investments. Second, largely for reasons of administrative convenience and facility, government must exercise the monopoly of bank credit creation, which government can do only through nationalization of the banks. Government, of course, might allow the private ownership and management of banking to continue and obtain whatever it wanted of them by forceful taking or commanding. But there are difficulties about such a course of procedure too obvious to need mention. It is possible, as is happening in many European countries, for government to get much of what it wants from privately owned banks through a system of procedure which combines in varying degrees government coercion and voluntary banker cooperation.

Nationalization of the banks is the simplest method, but the simplest method is not always the easiest to initiate. In this country it is little realized how powerful government can be, or how meek and cooperative bankers and big business men can learn to be once they have to deal with a strong government, to defy which they cannot every minute run into that courts with an expensive legal action.

The power to get the requisite amount of money for spending, in the first instance, by recourse to the device of bank credit, and the power to get the money back through taxation for re-spending, however, are not the only requisites for safely spending our way out of a depression. In exercising these powers, there are many problems of a highly technical character to be solved fairly scientifically if ultimate inflationary disaster is to be avoided. This is but another reason why these powers cannot be safely exercised by government under the liberal formula of divided powers and responsibilities.

Take the creation of credit, for one thing: This act, and the spending of the fiat money so created, imposes on the entire community a corresponding amount of forced saving. Under the liberal system, the bankers get the interest or profit on forced saving thus taken from the whole people and invested to produce wealth. Waiving the question of the moral right of the bankers to levy a profit on the enforced savings of the community, there is this to be said for a system of credit creation only by private bankers: it formerly had the control of some degree of banker responsibility. When banks were strictly private affairs, managed by men who had their entire fortune in the bank, and on terms which made the banker’s entire fortune responsible for the bank’s liabilities, this control was significant and fairly effective to check excessive inflation. Now that the biggest New York banks have come to be dominated by high pressure executives who hide their personal fortune under the ownership of their wives, or of dummy companies which the bank executives control but do not own, the control incidental to the responsibilities or liabilities of ownership does not operate. The dominating executive can wreck a bank while enriching himself, and when the wrecking is completed and he is ousted, he can find himself still a rich man by reason of the money he has salted away in his wife’s name.

All of this merely amounts to saying that the controls of private ownership no longer apply to large banks managed by men whose only stake in the bank is their yearly salary and bonus, and whose ruling principle of management can be to make hay for themselves while the sun shines. But a control on the creation of new credit is necessary, and it remains for any government using the power to create credit for social expenditure and investment to perfect satisfactory controls.

The only way to develop such a control is to follow the principles of honest accounting. By allowing a large field of private initiative in which private enterprise will make a bid for private and voluntary savings, the State will have the guidance of a capital return rate to indicate just how much people must be paid, as a practical matter, to induce them voluntarily to save the full amount required for business uses. When the government asks the people, or rather forces them through the credit financing of a five-or ten-year building program, to make a given amount of saving (which is, of course, returned to them or kept for them in the public assets created and the services so rendered), the government will be able to tell exactly by simple accounting methods how much, corresponding to an interest rate, it has levied on the people in this way.

It may be argued that government should always pay an interest on its borrowing in order to be governed more effectively by some control. Such borrowing is practiced on a large scale internally by communist Russia. Where there are no private banks, it is free of many of the evils of government borrowing from private banks, for then it is always direct borrowing of genuine private savings.

In a communist State, where there is no private business bidding for private savings, such borrowing has much to commend it as a guide or control to indicate the state of the personal or psychological factors in respect of saving. In a fascist State, such borrowing would be unnecessary for that reason, since some private enterprise would serve the same purpose of, control by bidding capital return for private savings. Moreover, such public borrowing under these circumstances would be harmful, for the reason that it would tend to divert voluntary savings from private enterprise. It would make the government a harmful competitor of private enterprise in the free capital market. This evil would be most vicious in the area of large investment funds and private fortunes. They are naturally apt to seek maximum safety and accept minimum return. It is socially desirable that large fortunes be forced to take average safety, run current business risks, and take their full share of current business losses. If large fortunes or funds are not thus kept pruned down, but are allowed to grow in geometrical progression at compound interest, without risk or managerial responsibilities, by the simple expedient of being invested is secure government obligations, it will be necessary to have such fortunes kept down by drastic direct government taxation or by terrific economic collapses and currency devaluations. The simplest way to keep private fortunes small is to force them to run all the risks of private enterprise. A few fortunes may thus grow large under the skillful or lucky management of one or two men for one or two generations but in time most large fortunes will get broken up in this way. Besides, as long as a large fortune is kept intact by personal and successful management of production, it is entitled to plead some of the defenses of private capitalism which are now absurdly invoked for fortunes, the owners and managers of which render no socially useful services.

Taxation still remains the most important instrumentality for averting or minimizing the evils of inflation and subsequent currency devaluation naturally inherent in any large government program of social expenditure and investment with that aid of credit money. Taxation, as most people understand it in a vague sort of way, is also an extremely complicated technical problem which should be given the most scientific solution possible. This is no place for the most summary discussion of tax theory and practice. Suffice it only to state a few obvious generalizations.

In the first place, fascism, by exalting the ideals of nationalism, must tend to change popular attitudes toward the payment of taxes. It is not good form in any reputable association, good club, a sporting party or an army, to be trying all the time to welsh out of some obligation to the group. Paying one’s full tax, and paying a heavy tax, should be as much a matte of personal pride as paying for a round of drinks in any social group.

In the second place, the altogether rational idea that taxes are merely payments for services rendered must be indoctrinated in the people. The larger the tax, the larger the service received. It does not really matter whether the service is rendered by the State or by the barber around the corner. What matters is whether the service is desired, and whether it has been efficiently and economically furnished. If the rich paid heavy taxes to eliminate the slums and beautify our cities, they would, given the cultivation of the right attitude, receive quite as much aesthetic satisfaction from the change in the environment which they are forced to live in or near as they derive from a few weeks or months a year spent on a private yacht or a country estate, or in the possession and contemplation of an expensive work of art. After all, the richest citizens in New York have to live within a stone’s throw of the slums, and as they drive to and from their country estates they have to suffer the sights and smells of the slums. Since, by reason of the ease of locomotion and the universal mania for movement, all of us are tending more and more to live in the entire country, money spent to make the country, as a whole, more pleasant to live in must be a service to all of us.

In the third place, the idea that some arbitrary equalization of fortunes and incomes by taxation is desirable must be popularized, even among the rich. As has been explained again and again in technical expositions of the principles of the capital levy, equalization by taxation does not need to involve any interference whatever with the organization and operation of large productive or service enterprises.

No sane tax or capital levy would put the Ford plant up for sale or force a change of management. Any amount of taxation or capital levy could be laid on that plant, or any other industry owned by a single family or individual, in a way to leave management unchanged and to provide for the payment of the tax or levy out of income. The Government could become a ten, fifty or seventy-five per cent shareholder of any productive plant without disrupting thereby the successful management of such a plant. The owners of the remaining shares of that plant would have just as much interest in maintaining efficient and profitable operation if the government owned fifty per cent of the income as if it owned ten per cent.

The notion that the intensity and attentiveness of a man’s efforts in a business are proportionate to the extent of his proprietorship rights is as silly as it is to suppose that a man owning a ten million dollar business is ten times as efficient and attentive as a man owning a million dollar business. It is not the size of the share, but the fact of having a share both in the profits and losses, which counts. After all, the executive owner of a very large enterprise is far more the slave of that job that the common laborer who can turn to a hundred different jobs any one of which he can do equally well. The bigger the executive, the fewer the opportunities for his peculiar talents.

And in the fourth and last place, the idea that taxation must be cut to meet the operation requirements of successful business must yield to the idea that business must be conducted in a way to meet the requirements of successful government taxation. It is perfectly true that business on the liberal capitalist formula can stand only limited taxation, for taxation is a cost which reduces profits, and liberal capitalist business needs large profits to flourish and offset large losses. But this merely proves that liberal capitalism is doomed, not necessarily private ownership and management. For the latter can flourish without either a high rate of profit or a steady compounding of surplus. To run private ownership and management on the theory of a small profit and a stable income is a feasible and fascist ideal but not an ideal of liberal capitalism.

The basic problems of a large program of government spending and investing to take up the slack in private spending and investing are those of honest and scientific cost accounting taxation, measurement, value judgments, and sheer administration. These problems cannot be attacked within the frame work of the liberal, parliamentary systems. Desirable result cannot be realized by legal enactment, prohibition or definition. They must be achieved only by successful management. This means the inevitability of the organization of an executive State and of the person of an adequate leader.

It is the custom to deride the ineptitudes and inadequacies of government officials. In connection with the proposal of a strong executive State and an adequate social program for that State, such derision is absurd. It is not true that government officials are notoriously incompetent or that the techniques of economic measurement, cost accounting, budget making and budget balancing, and scientific taxation, are not thoroughly understood by enough men to insure the success of an executive State which had our situation to meet.

Under the existing system, government officials have no chance of applying the science and skills which they have, or could have, simply because of the inhibitions of liberal social norms. It is a significant fact that business men and scientists rarely criticize army and navy officers, who are government officials, for failing to use science and technology in killing people. There is little doubt that every army and navy is using the latest and fullest resources of science and technology to the best of their ability or as well as possible with the appropriations and personnel available. So far as financial technique is concerned, we are quite as competent as we are in the arts of war. And the financial techniques can perform quite as well to facilitate a State undertaking in peace as in war. The goods can be produced, the means of payment can be provided, and the rhythm of payments and collections kept in proper relation to the rhythm of production and exchange, with such error and failures as characterize all human undertakings, provided only there is the will to achieve these results.